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Rating Action:

Moody's places ScottishPower Generation's rating on review for downgrade; affirms Scottish Power's ratings with stable outlook

19 Oct 2018

London, 19 October 2018 -- Moody's Investors Service ("Moody's") has today placed on review for downgrade the Baa1 issuer rating of ScottishPower Generation Ltd. ("SPGEN"). At the same time, Moody's has affirmed the ratings of Scottish Power Limited ("Scottish Power") and its other subsidiaries with a stable outlook.

The rating action follows the announcement on 16 October by Scottish Power's ultimate parent company, Iberdrola S.A. (Iberdrola, Baa1 stable), that it had agreed to sell 100% of the share capital in SPGEN to Drax Group plc ("Drax") for GBP702 million. The transaction is expected to complete on 31 December 2018, subject to approval by Drax's shareholders and regulatory clearance.

A full list of affected ratings is provided towards the end of this press release.

RATINGS RATIONALE

- RATIONALE FOR PLACING SPGEN'S RATING ON REVIEW

The review for downgrade reflects Moody's expectation that, upon closing of the transaction, the credit profile of SPGEN's new shareholder Drax, a power generator with installed capacity of 3.9 GW in the UK, will likely act as a cap on SPGEN's rating. The rating review will consider the impact of the planned change of ownership on the credit quality of SPGEN, taking into account Drax's future business and financial risk profile.

- RATIONALE FOR AFFIRMATION OF SCOTTISH POWER AND OTHER SUBSIDIARIES

The affirmation of the ratings of Scottish Power and its subsidiaries other than SPGEN reflects that the disposal of SPGEN, which owns 2.6 GW of installed generation capacity in the UK, is consistent with the strategy of Scottish Power's parent Iberdrola to focus on renewable energy, networks and customer solutions. Iberdrola will thus become, via Scottish Power, the first 100% renewable large utility in the UK.

The disposal will (1) strengthen further the proportion of Scottish Power's earnings that come from regulated and contracted activities, which in 2017 accounted for more than 90% of the group's EBITDA; and (2) boost its financial profile through reduced indebtedness. The GBP702 million disposal proceeds account for c. 13% of its GBP5.5 billion net adjusted debt at year-end 2017. After adjusting for SGPEN's cash flow generation (the company generated GBP36 million of EBITDA in 2017), Moody's estimates that the transaction will be accretive for Scottish Power's leverage ratios.

The ratings of Scottish Power and its subsidiaries (other than SPGEN) continue to be aligned with those of Iberdrola, reflecting (1) the Scottish Power group's stand-alone credit profile, which is based on its position as a vertically-integrated utility in the UK combined with a solid financial profile; and (2) some uplift to reflect its core position within Iberdrola, notably as the UK arm of its renewables businesses, and its close integration within the larger group. The latter is evidenced by (1) a centralised cash management system through Iberdrola group treasury, and (2) Iberdrola's ability to determine the debt structure of subsidiaries and move cash around the group.

The affirmation of the ratings on the senior unsecured notes issued by Scottish Power UK plc reflects (1) that they are guaranteed on a joint and several basis by SP Transmission plc, SP Distribution plc and SPGEN; and (2) Moody's expectation that SPGEN will be replaced as guarantor by another subsidiary of Scottish Power prior to completion of the transaction.

RATIONALE FOR STABLE OUTLOOK ON SCOTTISH POWER AND OTHER SUBSIDIARIES

The stable outlook is in line with that of their ultimate parent given the close integration within the Iberdrola group.

WHAT COULD CHANGE THE RATING UP/DOWN

- SPGEN

Given the review for downgrade, an upgrade of SPGEN's rating is unlikely. Conversely, the rating could be downgraded if the transaction is completed in line with the announced terms.

- SCOTTISH POWER AND OTHER SUBSIDIARIES

Ratings could be upgraded if the ratings of Iberdrola were to be upgraded, and the outlook was for Scottish Power's own financial profile to be maintained at least at the level of the Iberdrola group. Conversely, ratings could be downgraded in line with Iberdrola's, or if Scottish Power's own financial profile were to fall persistently below that of the broader group.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: Scottish Power Limited

....LT Issuer Rating, Affirmed Baa1

....Senior Unsecured MTN Program, Affirmed (P)Baa1

...Issuer: Scottish Power UK plc

.... ST Issuer Rating, Affirmed P-2

....LT Issuer Rating, Affirmed Baa1

....Other Short Term, Affirmed (P)P-2

....Senior Unsecured MTN Program, Affirmed (P)Baa1

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: ScottishPower Energy Management Limited

....LT Issuer Rating, Affirmed Baa1

..Issuer: ScottishPower Energy Retail Ltd

....LT Issuer Rating, Affirmed Baa1

..Issuer: ScottishPower Investments ltd

....LT Issuer Rating, Affirmed Baa1

..Issuer: SP Distribution plc

...LT Issuer Rating, Affirmed Baa1

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: SP Manweb plc

....LT Issuer Rating, Affirmed Baa1

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: SP Transmission plc

....LT Issuer Rating, Affirmed Baa1

On Review for Downgrade:

....Issuer: ScottishPower Generation Ltd

....LT Issuer Rating, Placed on Review for Downgrade, currently Baa1

Outlook Actions:

..Issuer: Scottish Power Limited

....Outlook, Remains Stable

..Issuer: Scottish Power UK plc

....Outlook, Remains Stable

..Issuer: ScottishPower Energy Management Limited

....Outlook, Remains Stable

..Issuer: ScottishPower Energy Retail Ltd

....Outlook, Remains Stable

..Issuer: ScottishPower Investments ltd

....Outlook, Remains Stable

..Issuer: SP Distribution plc

....Outlook, Remains Stable

..Issuer: SP Manweb plc

....Outlook, Remains Stable

..Issuer: SP Transmission plc

....Outlook, Remains Stable

..Issuer: ScottishPower Generation Ltd

....Outlook, Changed To Rating Under Review From Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Glasgow, the UK, Scottish Power Limited, a 100% subsidiary of Iberdrola S.A., is one of the leading energy companies in the UK. It reported group turnover of approximately GBP5.2 billion in 2017.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Paul Marty
Senior Vice President/Manager
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Neil Griffiths-Lambeth
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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